Credit Card Providers Make Millions from Payment Allocation

UK credit card issuers are making an estimated £500m profit from allocating payments to a card holder’s cheapest debt, according to Nationwide Building Society.

The building society hope to increase consumers awareness of how their credit card payments are allocated through a new TV advert.

When card holders make a payment to their card(s), most card providers will allocate payments to outstanding balances charged at the lowest interest rate, including any offers such as 0% balance transfers and 0% on purchases. This leaves balances such as purchases and cash advances accruing interest at higher rates thus drastically increasing profits for the card provider.

Currently, Nationwide is the only major credit card provider in the UK that allocates card payments to the balance subject to the highest interest rate, resulting in savings for their customers of up to £100 a year.

Despite the significant impact on how much interest a card holder can pay, many consumers still seem blissfully unaware of how their payments are allocated. This ignorance can partly be attributed to credit card companies failing to make their customers aware of the order in which payments are allocated. Nationwide’s research revealed that 40% of credit card holders were unaware that most card issuers who offer introductory deals use a customer’s repayments to pay off the cheapest debt first.

Ironically, card holders who take advantage of low interest introductory offers to save money end up paying more in the long run due to being unaware that their other card debt is accruing high interest.

Sadly, it appears the consumer group that suffers most from card payment allocations are the vulnerable. Those who withdraw cash on their credit cards most are card holder4s who at times have no other source of cash. Unfortunately cash withdrawals using credit cards are subject to high interest rates, sometimes the highest levied by the provider, and these balances are not paid off until balance transfers and purchases are paid off first, leaving the cash withdrawal debt to build.

Nationwide executive director Stuart Bernau said: “ Many credit card providers use low introductory rates to lure people into opening an account. These offers can look very appealing, but when you scratch beneath the surface you discover that credit card holders often don’t receive the full benefits of these low rates. Most providers apply repayments to the cheapest debt first making it more expensive for you and more profitable for them. We call on the industry to play fair by consumers and apply repayments to the most expensive debt first.”

Alisdair Milton
8th June 2006